STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997 AS SUPPLEMENTED JUNE 16, 1997
BT INSURANCE FUNDS TRUST
Small Cap Index Fund
BT Insurance Funds Trust (the "Trust") is currently comprised of six
series: the Small Cap Index Fund (the "Fund") and five other series. The shares
of the Fund are described herein. Capitalized terms not otherwise defined herein
shall have the same meaning as in the Prospectus.
Table of Contents
Risk Factors and Certain Securities and Investment Practices.. 2
Performance Information..........................................12
Valuation of Securities; Redemption in Kind..................... 13
Management of the Trust......................................... 14
Organization of the Trust....................................... 18
Taxation........................................................ 18
Shares of the Fund are available to the public only through the purchase of
certain variable annuity and variable life insurance contracts ("Contract(s)")
issued by various insurance companies (the "Companies"). The investment adviser
of the Fund is Bankers Trust Global Investment Management, a unit of Bankers
Trust Company (the "Manager" or "Bankers Trust"). The distributor of the Fund
shares is 440 Financial Distributors, Inc. (the "Distributor" or "440
Distributors").
The Prospectus for the Fund is dated February 5, 1997 as supplemented June 16,
1997. The Prospectus provides the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
Customer Service Center at the telephone number shown in the accompanying
prospectus. This Statement of Additional Information, which is not a Prospectus,
is intended to provide additional information regarding the activities and
operations of the Fund and should be read in conjunction with the Fund's
Prospectus. This Statement of Additional Information is not an offer of any Fund
for which an investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have the meanings
accorded to them in the Fund's Prospectus.
BANKERS TRUST GLOBAL INVESTMENT MANAGEMENT, a unit of BANKERS TRUST COMPANY
Investment Manager of the Fund
The Trust's distributor is 440 FINANCIAL DISTRIBUTORS, INC., 4400 Computer
Drive, Westborough, MA 01581.
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RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
Investment Objective
The investment objective of the Fund is described in the Fund's
Prospectus. There can, of course, be no assurance that the Fund will achieve its
investment objective.
Investment Practices
The following is a discussion of the various investments of and
techniques employed by the Fund:
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the "1933
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act of resales of certain securities to qualified institutional buyers. The
Manager anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
The Manager will monitor the liquidity of Rule 144A securities in the
Fund's portfolio under the supervision of the Trust's Board of Trustees. In
reaching liquidity decisions, the Manager will consider, among other things, the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers and other potential purchasers wishing to purchase or sell
the security; (iii) dealer undertakings to make a market in the security and
(iv) the nature of the security and of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Lending of Portfolio Securities. The Fund has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. The
Fund will not lend securities to Bankers Trust, the Distributor or their
affiliates. By lending its securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. Government obligations are used
as collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
adhere to the following conditions whenever its securities are loaned: (i) the
Fund must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the level
of the collateral; (iii) the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Trust's Board of Trustees must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When the Fund experiences large cash inflows
through the sale of securities and desirable equity securities, that are
consistent with the Fund's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Fund may hold short-term
investments for a limited time pending availability of such equity securities.
Short-term instruments consist of: (i) short-term obligations issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities or
by any of the states; (ii) other short-term debt securities rated AA or higher
by S&P or Aa or higher by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time the Fund invests in
commercial paper, bank obligations or repurchase agreements, the issuer of the
issuer's parent must have outstanding debt rated AA or higher by S&P or Aa or
higher by Moody's or outstanding commercial paper or bank obligations rated A-1
by S&P or Prime-1 by Moody's; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of Bankers Trust.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Fund until settlement takes place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, the Fund will
maintain with the Fund's custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow. If the Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other Fund obligation,
incur a gain or loss due to market fluctuation. It is the current policy of the
Fund not to enter into when-issued commitments exceeding in the aggregate 15% of
the market value of the Fund's total assets, less liabilities other than the
obligations created by when-issued commitments.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Fund must look principally to
the federal agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which the Fund may invest that are not backed by the full faith
and credit of the United States include, but are not limited to, obligations of
the Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation and
the U.S. Postal Service, each of which has the right to borrow from the U.S.
Treasury to meet its obligations, and obligations of the Federal Farm Credit
System and the Federal Home Loan Banks, both of whose obligations may be
satisfied only by the individual credits of each issuing agency. Securities
which are backed by the full faith and credit of the United States include
obligations of the Government National Mortgage Association, the Farmers Home
Administration, and the export-import Bank.
Equity Investments. The Fund may invest in equity securities listed on
any domestic securities exchange or traded in the over-the-counter market as
well as certain restricted or unlisted securities. They may or may not pay
dividends or carry voting rights. Common stock occupies the most junior position
in a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
or emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage, by among other things, agreeing to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). At the time the Fund enters into a reverse repurchase
agreement it will place in a segregated custodial cash account, U.S. Government
Obligations or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by the Fund.
Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of time. The
strike price of warrants sometimes is much lower than the current market price
of the underlying securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a debt security
or preferred stock which may be converted into common stock or carries the right
to purchase common stock. Convertible securities entitle the holder to exchange
the securities for a specified number of shares of common stock, usually of the
same company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Manager's skill and experience with respect to such instruments. When futures
are purchased to hedge against a possible increase in the price of securities
before the Fund is able to invest its cash (or cash equivalents) in an orderly
fashion, it is possible that the market may decline instead; if the Fund then
concludes not to invest its cash at that time because of concern as to possible
further market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of the
instruments that were to be purchased. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in the price of the securities hedged will not be perfect and could
produce unanticipated losses.
Successful use of the futures contract and related options are subject
to special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities in the Fund. Successful use of futures or options
contracts is further dependent on Bankers Trust's ability to correctly predict
movements in the securities markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices are subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying securities above the
options exercise price.
Futures Contracts. The Fund may enter into securities index futures
contracts. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
These investments will be made by the Fund solely for cash management
purposes. Such investments will only be made if they are economically
appropriate to the reduction of risks involved in the management of the Fund. In
this regard, the Fund may enter into futures contracts or options on futures
related to the Russell 2000 Index.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions.
In addition, futures contracts entail risks. The Manager believes that
use of such contracts will benefit the Fund. The successful use of futures
contracts, however, depends on the degree of correlation between the futures and
securities markets.
Options on Futures Contracts. The Fund may use stock index futures on a
continual basis to equitize cash so that the Fund may maintain 100% equity
exposure. The Board of Trustees has adopted a restriction that the Fund will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Fund and premiums paid on outstanding options on futures contracts owned by the
Fund (other than those entered into for bona fide hedging purposes) would exceed
5% of the market value of the total assets of the Fund.
The Fund may purchase and write options on the futures contract
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. In anticipation
of a decline in interest rates, the Fund may purchase call options on futures
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Fund intends to
purchase. Similarly, if the value of the securities held by the Fund is expected
to decline as a result of an increase in interest rates, the Fund might purchase
put options or sell call options on futures contracts rather than sell futures
contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contracts. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
The Fund's ability to terminate over-the-counter options will be more
limited than with exchange-traded options. It is also possible that
broker-dealers participating in over-the-counter options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes its
position, the Fund will treat purchased over-the-counter options and assets used
to cover written over-the-counter options as illiquid securities. With respect
to options written with primary dealers in U.S. Government securities pursuant
to an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
Options on Securities Indices. The Fund may purchase and write (sell)
call and put options on securities indices. Such options give the holder the
right to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index.
Options on securities indices entail certain risks. The absence of a
liquid secondary market to close out options positions on securities indices may
occur, although the Fund generally will only purchase or write such an option if
the Manager believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase such options unless the
Manager believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Manager may be forced to liquidate portfolio
securities to meet settlement obligations.
Investment Restrictions
The following investment restrictions are "fundamental policies" of the
Fund and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Fund. "Majority of the outstanding voting
securities" under the 1940 Act, and as used in this Statement of Additional
Information and the Prospectus, means, with respect to the Fund, the lesser of
(i) 67% or more of the outstanding voting securities of the Fund present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's assets,
it may borrow money as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction (as an operating policy, the Funds may not
engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Trust or the Funds may technically be deemed an underwriter under the 1933 Act
in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value); or (b) through the use of
repurchase agreements or the purchase of short-term obligations;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
in the ordinary course of business (except that the Trust may hold and sell, for
the Fund's portfolio, real estate acquired as a result of the Fund's ownership
of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of
the Fund's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder (except to the extent permitted in investment
restriction No. 1), provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction; and
(7) purchase the securities of any one issuer if as a result more than
5% of the value of its total assets would be invested in the securities of such
issuer or the Fund would own more than 10% of the outstanding voting securities
of such issuer, except that up to 25% of the value of its total assets may be
invested without regard to these 5% limitation and provided that there is no
limitation with respect to investments in U.S. Government Securities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Trustees, provide that the Fund may not:
(i) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or management;
(iii) purchase for the Fund securities of any investment company if such
purchase at the time thereof would cause: (a) more than 10% of the Fund's total
assets (taken at the greater of cost or market value) to be invested in the
securities of such issuers; (b) more than 5% of the Fund's total assets (taken
at the greater of cost or market value) to be invested in any one investment
company; or (c) more than 3% of the outstanding voting securities of any such
issuer to be held for the Fund (as an operating policy, the Fund will not invest
in another open-end registered investment company); or
(iv) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board
of Trustees; and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which is not traded flat or in
default as to interest or principal.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
The Fund will comply with the state securities laws and regulations of
all states in which it is registered.
Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on fund transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon the exercise of options. Orders may be directed to
any broker-dealer or futures commission merchant, including to the extent and in
the manner permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain fund securities on behalf of the Fund
are frequently placed by the Manager with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any brokerage
commission being paid by the Fund. Trading does, however, involve transaction
costs. Transactions with dealers serving as market-makers reflect the spread
between the bid and asked prices. Transaction costs may also include fees paid
to third parties for information as to potential purchasers or sellers of
securities. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The Manager seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Fund taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Manager reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Manager is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for the Fund with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Trust may determine, the Manager may consider sales of
shares of a Fund as a factor in the selection of broker-dealers to execute
portfolio transactions. Bankers Trust will make such allocations if commissions
are comparable to those charged by nonaffiliated, qualified broker-dealers for
similar services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research information
in managing the Fund's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Fund and to the Manager, it is the
opinion of the management of the Trust that such information is only
supplementary to the Manager's own research effort, since the information must
still be analyzed, weighed and reviewed by the Manager's staff. Such information
may be useful to the Manager in providing services to clients other than the
Fund, and not all such information is used by the Manager in connection with the
Fund. Conversely, such information provided to the Manager by brokers and
dealers through whom other clients of the Manager effect securities transactions
may be useful to the Manager in providing services to the Fund.
In certain instances there may be securities which are suitable for the
Fund as well as for one or more of the Manager's other clients. Investment
decisions for the Fund and for the Manager's other clients are made with a view
to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. However, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
Total Return: The Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000
(made at the maximum public offering price with all distributions
reinvested) to reach the value of that investment at the end of the
periods. The Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.
Performance Results: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and offering price of
shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund, but also on changes in
the current value of such securities and on changes in the expenses of
the Fund. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total
return of the Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Evaluations of the Fund's performance made by independent sources may
also be used in advertisements concerning the Fund. Sources for the Fund's
performance information could include the following: Barron's, Business Week,
Changing Times, The Kiplinger's Magazine, Consumer Digest, Financial Times,
Financial World, Forbes, Fortune, Investor's Daily, Lipper Analytical Services,
Inc.'s Mutual Fund Performance Analysis, Money, Morningstar Inc., New York
Times, Personal Investing News, Personal Investor, Success, U.S. News and World
Report, Value Line, Wall Street Journal, Weisenberger Investment Companies
Services and Working Women.
VALUATION OF SECURITIES; REDEMPTION IN KIND
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities for
which price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt obligations
and money market securities maturing in 60 days or less are valued at amortized
cost, which approximates market.
Securities for which market quotations are not available are valued by
Bankers Trust pursuant to procedures adopted by the Trust's Board of Trustees.
It is generally agreed that securities for which market quotations are not
readily available should not be valued at the same value as that carried by an
equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the
Manager of the Fund will value such securities based upon all relevant factors
as outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if conditions
exist which make cash payments undesirable, to honor any request for redemption
or repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Trust, and valued as they are for purposes of computing
the Fund's net asset value (a redemption in kind). If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting these securities into cash. The Trust, on behalf of the Fund, and the
Fund have elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares with respect to any one
investor during any 90-day period, solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund at the beginning of the period.
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is composed of persons experienced
in financial matters who meet throughout the year to oversee the activities of
the Fund. In addition, the Trustees review contractual arrangements with
companies that provide services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is One Exchange Place, Boston,
Massachusetts.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Trustees and Officers
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 45 Trustee President of Leadership Capital Inc.
118 North Drive since 1995; Chief Operating Officer of
North Massapequa, NY 11758 CS First Boston Investment Management
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 52 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 65 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 55 Trustee and President Executive Vice President of First Data
Investor Services Group Inc. ("First
Data") since 1994; Senior Vice
President of The Shareholder Services
Group, Inc. (1993-1994); independent
consultant (1990-1993).
Michael Kardok, 37 Vice President and Treasurer Vice President of First Data since May
1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Julie A. Tedesco, 39 Vice President and Secretary Counsel of First Data since May 1994;
Counsel of The Boston Company Advisors
Inc. (1992-1994); Associate at
Hutchins, Wheeler & Dittmar prior to
July 1992.
</TABLE>
Mr. Kardok and Ms. Tedesco also hold similar positions for other investment
companies for which 440 Distributors or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trust. No director, officer or employee of 440 Distributors or
any of its affiliates will receive any compensation from the Trust for serving
as an officer or Trustee of the Trust.
As of September 1, 1996 the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of the Fund or the Trust (all series
taken together).
Investment Manager
Under the terms of the Fund's investment management agreement with
Bankers Trust (the "Management Agreement"), Bankers Trust manages the Fund
subject to the supervision and direction of the Board of Trustees of the Trust.
Bankers Trust will: (i) act in strict conformity with the Trust's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Fund in accordance with the Fund's
investment objectives, restrictions and policies; (iii) make investment
decisions for the Fund; (iv) place purchase and sale orders for securities and
other financial instruments on behalf of the Fund; (v) oversee the
administration of all aspects of the Trust's business and affairs; and (vi)
supervise the performance of professional services provided by others.
Bankers Trust bears all expenses in connection with the performance of
services under the Management Agreement. The Fund bears certain other expenses
incurred in its operation, including: taxes, interest, brokerage fees and
commissions, if any; fees of Trustees of the Trust who are not officers,
directors or employees of Bankers Trust, 440 Distributors or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; cost of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust; and any
extraordinary expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Fund, including outstanding loans to such issuers which could be repaid
in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust, in making its investment decisions, does not obtain or use material
inside information in its possession or in the possession of any of its
affiliates. In making investment recommendations for the Fund, Bankers Trust
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by the Fund is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and in dealing with its customers,
Bankers Trust, its parent, subsidiaries and affiliates will not inquire or take
into consideration whether securities of such customers are held by any fund
managed by Bankers Trust or any such affiliate.
The Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees.
Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of the Fund (including fees pursuant to the Management Agreement, but
excluding interest, taxes, brokerage and, if permitted by the relevant state
securities commissions, extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Fund, Bankers Trust will reimburse the
Fund for the excess expense to the extent required by state law. As of the date
of this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.50% of the Fund's first $30 million of
average annual net assets, 2.00% of the next $70 million of average annual
assets and 1.50% of the remaining average annual net assets.
Administrator
First Data, One Exchange Place, Boston, Massachusetts 02109, serves as
administrator of the Fund. As administrator, First Data is obligated on a
continuous basis to provide such administrative services as the Board of
Trustees of the Trust reasonably deems necessary for the proper administration
of the Fund. First Data will generally assist in all aspects of the Fund's
operations; supply and maintain office facilities (which may be in First Data's
own offices), statistical and research data, data processing services, clerical,
accounting, bookkeeping and recordkeeping services (including without limitation
the maintenance of such books and records as are required under the 1940 Act and
the rules thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities; supply supporting documentation
for meetings of the Board of Trustees; provide monitoring reports and assistance
regarding compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with Federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net income and
realized capital gains or losses, and negotiate arrangements with, and supervise
and coordinate the activities of, agents and others to supply services.
Custodian and Transfer Agent
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
custodian for the Fund. As custodian, it holds the Fund's assets. Bankers Trust
will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
First Data serves as transfer agent of the Trust. Under its transfer
agency agreement with the Trust, First Data maintains the shareholder account
records for the Fund, handles certain communications between shareholders and
the Fund and causes to be distributed any dividends and distributions payable by
the Fund.
Bankers Trust and First Data may be reimbursed by the Fund for
out-of-pocket expenses.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment manager to
the Fund. The Trust has acknowledged that the term "BT" is used by and is a
property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.
The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the acronym "BT" as part of its name. If this were to
occur, the Trustees would select an appropriate new name for the Trust, but
there would be no other material effect on the Trust, its shareholders or
activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Fund contemplated by the
Management Agreement and other activities for the Fund described in the
Prospectus and this Statement of Additional Information without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. However,
counsel has pointed out that future changes in either Federal or state statutes
and regulations concerning the permissible activities of banks or trust
companies, as well as future judicial or administrative decisions or
interpretations of present and future statutes and regulations, might prevent
Bankers Trust from continuing to perform those services for the Trust and the
Fund. State laws on this issue may differ from the interpretations of relevant
Federal law and banks and financial institutions may be required to register as
dealers pursuant to state securities law. If the circumstances described above
should change, the Boards of Trustees would review the relationships with
Bankers Trust and consider taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as Counsel to the Trust and the Fund.
Ernst & Young L.L.P., 787 Seventh Avenue, New York, New York 10019, acts as
independent accountants of the Trust and the Fund.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
Through its separate accounts the Companies are the Fund's sole
stockholders of record, so under the 1940 Act, the Companies are deemed to be in
control of the Fund. Nevertheless, when a shareholders' meeting occurs, each
Company solicits and accepts voting instructions from its Contractowners who
have allocated or transferred monies for a investment in the Fund as of the
record date of the meeting. Each Company then votes the Fund's shares that are
attributable to its Contractowners' interests in the Fund in proportion to the
voting instructions received. Each Company will vote any share that it is
entitled to vote directly due to amounts it has contributed or accumulated in
its separate accounts in the manner described in the offering memoranda for its
variable annuities and variable life insurance policies.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by a Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
The Trust was organized on January 19, 1996.
TAXATION
Taxation of the Funds
The Trust intends to qualify annually and to elect the Fund to be
treated as a regulated investment company under the Code.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to its shareholders, that is, the
Companies' separate accounts. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains and, therefore, does not anticipate
incurring Federal income tax liability.
The Code and Treasury Department regulations promulgated thereunder
require that mutual funds that are offered through insurance company separate
accounts must meet certain diversification requirements to preserve the
tax-deferred benefits provided by the variable contracts which are offered in
connection with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The offering memoranda
for each Company's variable annuities and variable life insurance policies
describe the federal income tax treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code, the Fund
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h) of
the Code, obligations of the U.S. Treasury and each U.S. Government
instrumentality are treated as securities of separate issuers. The Treasury
Department has indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control of the
investments of a separate account may cause the variable contract owner, rather
than the separate account's sponsoring insurance company, to be treated as the
owner of the assets held by the separate account. If the variable annuity
contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the variable annuity contract owner's gross income. It is not known
what standards will be set forth in such pronouncements or when, if at all,
these pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not have to change
its investment policies or goals.
The foregoing is only a brief summary of important tax law provisions
that affect the Fund. Other Federal, state or local tax law provisions may also
affect the Fund and its operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a variable contract to or from the
Fund should consult a qualified tax adviser.
Distributions
All dividends and capital gains distributions paid by the Fund will be
automatically reinvested, at net asset value, by the Companies' separate
accounts in additional shares of the Fund. There is no fixed dividend rate, and
there can be no assurance that the Fund will pay any dividends or realize any
capital gains. However, the Fund currently intends to pay dividends and capital
gains distributions, if any, on an annual basis. The offering memorandum for a
Company's variable annuity or variable life insurance policies describes the
frequency of distributions to Contractowners and the Federal income tax
treatment of distributions from such contracts to Contractowners.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of the Fund, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of fund
shares held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
Shareholders will be notified annually as to the U.S. Federal tax
status of distributions.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. Federal income tax
liability.
Other Taxation
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor the Fund is viable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
Fund shareholders may be subject to state and local taxes on their fund
distributions. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
<PAGE>
Investment Manager of the Fund
BANKERS TRUST GLOBAL INVESTMENT MANAGEMENT
a unit of
BANKERS TRUST COMPANY
Administrator
FIRST DATA INVESTOR SERVICES GROUP, INC.
Distributor
440 FINANCIAL DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
FIRST DATA INVESTOR SERVICES GROUP, INC.
Independent Accountants
ERNST & YOUNG LLP
Counsel
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Fund's Prospectuses, the
Statement of Additional Information or the Trust's official sales literature in
connection with the offering of the Fund's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectus nor this Statement of Additional
Information constitutes an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997 AS SUPPLEMENTED JUNE 16, 1997
BT INSURANCE FUNDS TRUST
EAFE(R) Equity Index Fund
BT Insurance Funds Trust (the "Trust") is currently comprised of six
series: the EAFE(R) Equity Index Fund (the "Fund") and five other series. The
shares of the Fund are described herein. Capitalized terms not otherwise defined
herein shall have the same meaning as in the Prospectus.
Table of Contents
Risk Factors and Certain Securities and Investment Practices... 2
Performance Information........................................ 16
Valuation of Securities; Redemption in Kind.................... 17
Management of the Trust......................................... 18
Organization of the Trust....................................... 22
Taxation........................................................ 23
Shares of the Fund are available to the public only through the purchase of
certain variable annuity and variable life insurance contracts ("Contract(s)")
issued by various insurance companies (the "Companies"). The investment adviser
of the Fund is Bankers Trust Global Investment Management, a unit of Bankers
Trust Company (the "Manager" or "Bankers Trust"). The distributor of the Fund
shares is 440 Financial Distributors, Inc. (the "Distributor" or "440
Distributors").
The Prospectus for the Fund is dated February 5, 1997 as supplemented June 16,
1997. The Prospectus provides the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
Customer Service Center at the telephone number shown in the accompanying
prospectus. This Statement of Additional Information, which is not a Prospectus,
is intended to provide additional information regarding the activities and
operations of the Fund and should be read in conjunction with the Fund's
Prospectus. This Statement of Additional Information is not an offer of any Fund
for which an investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have the meanings
accorded to them in the Fund's Prospectus.
BANKERS TRUST GLOBAL INVESTMENT MANAGEMENT, a unit of BANKERS TRUST COMPANY
Investment Manager of the Fund
The Trust's distributor is 440 FINANCIAL DISTRIBUTORS, INC., 4400 Computer
Drive, Westborough, MA 01581.
<PAGE>
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
Investment Objective
The investment objective of the Fund is described in the Fund's
Prospectus. There can, of course, be no assurance that the Fund will achieve its
investment objective.
Investment Practices
The following is a discussion of the various investments of and
techniques employed by the Fund:
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the "1933
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act of resales of certain securities to qualified institutional buyers. The
Manager anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
The Manager will monitor the liquidity of Rule 144A securities in the
Fund's portfolio under the supervision of the Trust's Board of Trustees. In
reaching liquidity decisions, the Manager will consider, among other things, the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers and other potential purchasers wishing to purchase or sell
the security; (iii) dealer undertakings to make a market in the security and
(iv) the nature of the security and of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Lending of Portfolio Securities. The Fund has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. The
Fund will not lend securities to Bankers Trust, the Distributor or their
affiliates. By lending its securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. Government obligations are used
as collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
adhere to the following conditions whenever its securities are loaned: (i) the
Fund must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the level
of the collateral; (iii) the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Trust's Board of Trustees must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When the Fund experiences large cash inflows
through the sale of securities and desirable equity securities, that are
consistent with the Fund's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Fund may hold short-term
investments for a limited time pending availability of such equity securities.
Short-term instruments consist of foreign and domestic: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt securities
rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and bankers' acceptances; and (v) repurchase agreements. At the time the Fund
invests in commercial paper, bank obligations or repurchase agreements, the
issuer of the issuer's parent must have outstanding debt rated AA or higher by
S&P or Aa or higher by Moody's or outstanding commercial paper or bank
obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of
Bankers Trust. These instruments may be denominated in U.S dollars or in foreign
currencies.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Fund until settlement takes place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, the Fund will
maintain with the Fund's custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow. If the Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other Fund obligation,
incur a gain or loss due to market fluctuation. It is the current policy of the
Fund not to enter into when-issued commitments exceeding in the aggregate 15% of
the market value of the Fund's total assets, less liabilities other than the
obligations created by when-issued commitments.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Fund must look principally to
the federal agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which the Fund may invest that are not backed by the full faith
and credit of the United States include, but are not limited to, obligations of
the Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation and
the U.S. Postal Service, each of which has the right to borrow from the U.S.
Treasury to meet its obligations, and obligations of the Federal Farm Credit
System and the Federal Home Loan Banks, both of whose obligations may be
satisfied only by the individual credits of each issuing agency. Securities
which are backed by the full faith and credit of the United States include
obligations of the Government National Mortgage Association, the Farmers Home
Administration, and the export-import Bank.
Equity Investments. The Fund may invest in equity securities listed on
any domestic or foreign securities exchange or traded in the over-the-counter
market as well as certain restricted or unlisted securities. They may or may not
pay dividends or carry voting rights. Common stock occupies the most junior
position in a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
or emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage, by among other things, agreeing to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). At the time the Fund enters into a reverse repurchase
agreement it will place in a segregated custodial cash account, U.S. Government
Obligations or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by the Fund.
Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of time. The
strike price of warrants sometimes is much lower than the current market price
of the underlying securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a debt security
or preferred stock which may be converted into common stock or carries the right
to purchase common stock. Convertible securities entitle the holder to exchange
the securities for a specified number of shares of common stock, usually of the
same company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Foreign Securities: Special Considerations Concerning Hong Kong,
Malaysia, Singapore and Japan. Many Asian countries may be subject to a greater
degree of social, political and economic instability than is the case in the
United States and European countries. Such instability may result from (i)
authoritarian governments or military involvement in political and economic
decision-making; (ii) popular unrest associated with demands for improved
political, economic and social conditions; (iii) internal insurgencies; (iv)
hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection.
The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has not
initially had a positive effect on its economic growth which was vigorous in the
1980s. However, authorities in Beijing have agreed to maintain a capitalist
system for 50 years that, along with Hong Kong's economic growth, continued to
further strong stock market returns. In preparation for 1997, Hong Kong has to
develop trade with China, where it is the largest foreign investor, while also
maintaining its long-standing export relationship with the United States.
Spending on infrastructure improvements is a significant priority of the
colonial government while the private sector continues to diversify abroad based
on its position as an established international trade center in the Far East.
The Hong Kong stock market is undergoing a period of growth and change
which may result in trading volatility and difficulties in the settlement and
recording of transactions, and in interpreting and applying the relevant law and
regulations.
The Malaysian economy continued to perform well, growing at an average
annual rate of 9% from 1987 through 1991. This placed Malaysia as one of the
fastest growing economies in the Asian-Pacific region. Malaysia has become the
world's third-largest producer of semiconductor devices (after the US and Japan)
and the world's largest exporter of semiconductor devices. More remarkable is
the country's ability to achieve rapid economic growth with relative price
stability (2% inflation over the past five years) as the government followed
prudent fiscal/monetary policies. Malaysia's high export dependence level leaves
it vulnerable to a recession in the Organization for Economic Cooperation and
Development countries or a fall in world commodity prices.
Singapore has an open entrepreneurial economy with strong service and
manufacturing sectors and excellent international trading links derived from its
history. During the 1970s and early 1980s, the economy expanded rapidly,
achieving an average annual growth rate of 9%. Per capita GDP is among the
highest in Asia.
Singapore holds a position as a major oil refining and services center.
Investing in Japanese securities may involve the risks associated with
investing in foreign securities generally. In addition, because it invests in
Japan, the Fund will be subject to the general economic and political conditions
in Japan.
Share prices of companies listed on Japanese stock exchanges and on the
Japanese OTC market reached historical peaks (which were later referred to as
the "bubble") as well as historically high trading volumes in 1989 and 1990.
Since then, stock prices in both markets decreased significantly, with listed
stock prices reaching their lowest levels in the third quarter of 1992 and OTC
stock prices reaching their lowest levels in the fourth quarter of 1992. During
the period from January 1, 1989 through December 31, 1994, the highest Nikkei
stock average and Nikkei OTC average were 38,915.87 and 4,149.20, respectively,
and the lowest for each were 14,309.41 and 1,099.32, respectively. There can be
no assurance that additional market corrections will not occur.
The common stocks of many Japanese companies continue to trade at high
price earnings ratios in comparison with those in the United States, even after
the recent market decline. Differences in accounting methods make it difficult
to compare the earnings of Japanese companies with those of companies in other
countries, especially the United States.
Since the Fund invests in securities denominated in yen, changes in
exchange rates between the U.S. dollar and the yen affect the U.S. dollar value
of the Fund's assets. Such rate of exchange is determined by forces of supply
and demand on the foreign exchange markets. These forces are in turn affected by
the international balance of payments and other economic, political and
financial conditions, government intervention, speculation and other factors.
Japanese securities held by the Fund are not registered with the SEC
nor are the issuers thereof subject to its reporting requirements. There may be
less publicly available information about issuers of Japanese securities than
about U.S. companies and such issuers may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those to which
U.S. companies are subject.
Although the Japanese economy has grown substantially over the past
four decades, recently the rate of growth had slowed substantially. During 1991,
1992 and 1993, the Japanese economy grew at rates of 4.3%, 1.1% and 0.1%,
respectively, as measured by real gross domestic product.
Japan's success in exporting its products has generated a sizable trade
surplus. Such trade surplus has caused tensions at times between Japan and some
of its trading partners. In particular, Japan's trade relations with the United
States have recently been the subject of discussion and negotiation between the
two nations. The United States has imposed certain measures designed to address
trade issues in specific industries. These measures and similar measures in the
future may adversely affect the performance of the Fund.
Japan's economy has typically exhibited low inflation and low interest
rates. There can be no assurance that low inflation and low interest rates will
continue, and it is likely that a reversal of such factors would adversely
affect the Japanese economy. Moreover, the Japanese economy may differ,
favorably or unfavorably, from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
have on prospective regulatory reforms of the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the Fund.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Manager's skill and experience with respect to such instruments. When futures
are purchased to hedge against a possible increase in the price of securities
before the Fund is able to invest its cash (or cash equivalents) in an orderly
fashion, it is possible that the market may decline instead; if the Fund then
concludes not to invest its cash at that time because of concern as to possible
further market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of the
instruments that were to be purchased. Successful use of futures to hedge
against foreign exchange risk depends on the Manager's ability to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and thus will be
in a worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
Successful use of the futures contract and related options are subject
to special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or currency in the Fund. Successful use of futures
or options contracts is further dependent on Bankers Trust's ability to
correctly predict movements in the securities or foreign currency markets and no
assurance can be given that its judgment will be correct. Successful use of
options on securities or stock indices are subject to similar risk
considerations. In addition, by writing covered call options, the Fund gives up
the opportunity, while the option is in effect, to profit from any price
increase in the underlying securities above the options exercise price.
Futures Contracts. The Fund may enter into contracts for the purchase
or sale for future delivery of foreign currencies or contracts based on the EAFE
Index. U.S. futures contracts have been designed by exchanges which have been
designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions.
In addition, futures contracts entail risks. The Manager believes that
use of such contracts will benefit the Fund. The successful use of futures
contracts, however, depends on the degree of correlation between the futures and
securities markets.
Options on Futures Contracts. A futures option gives the holder, in
return for the premium paid, the right to buy (call) from or sell (put) to the
writer of the option a futures contract at a specified price at any time during
the period of the option. Upon exercise, the writer of the option is obligated
to pay the difference between the cash value of the futures contract the
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing an option of the
same series, at which time the person entering into the closing transaction will
realize a gain or loss. The Fund will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by its pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
In anticipation of a decline in interest rates, the Fund may purchase call
options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund intends to purchase. Similarly, if the value of the securities held by
the Fund is expected to decline as a result of an increase in interest rates,
the Fund might purchase put options or sell call options on futures contracts
rather than sell futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involved less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
.........
The Trust's Board of Trustees has adopted the requirement for the Fund
that futures contracts and options on futures contracts be used as a hedge and
may also use stock index futures on a continual basis to equitize cash so that
the Fund may maintain 100% equity exposure. In addition to this requirement, the
Board of Trustees has also adopted a restriction that the Fund will not enter
into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Fund and premiums paid on outstanding options on futures contracts owned by the
Fund (other than those entered into for bona fide hedging purposes) would exceed
5% of the market value of the total assets of the Fund.
Additional Risks of Options on Futures Contracts and Forward Contracts.
Unlike transactions entered into by the Fund in futures contracts, forward
contracts are not traded on contract markets regulated by the CFTC or (with the
exception of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as market-makers.
The Fund's ability to terminate over-the-counter options will be more
limited than with exchange-traded options. It is also possible that
broker-dealers participating in over-the-counter options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes its
position, the Fund will treat purchased over-the-counter options and assets used
to cover written over-the-counter options as illiquid securities. With respect
to options written with primary dealers in U.S. Government securities pursuant
to an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
Futures contracts, options on futures contracts and forward contracts
may be traded on foreign exchanges. Such transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by: (i)
other complex foreign political and economic factors; (ii) lesser availability
than in the United States of data on which to make trading decisions; (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the United States; (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States; and (v) lesser trading volume.
Options on Securities Indices. The Fund may purchase and write (sell)
call and put options on securities indices. Such options give the holder the
right to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index.
Options on securities indices entail certain risks. The absence of a
liquid secondary market to close out options positions on securities indices may
occur, although the Fund generally will only purchase or write such an option if
the Manager believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase such options unless the
Manager believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Manager may be forced to liquidate portfolio
securities to meet settlement obligations.
Forward Foreign Currency Exchange Contracts. Because the Fund may buy
and sell securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the U.S.
dollar, the Fund from time to time may enter into foreign currency exchange
transactions to convert to and from different foreign currencies and to convert
foreign currencies to and from the U.S. dollar. The Fund either enters into
these transactions on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market or uses forward contracts to purchase or
sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a fund
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without commission. The Fund maintains with its custodian a segregated
account of cash and liquid portfolio assets in an amount at least equal to its
obligations under each forward foreign currency exchange contract. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Fund may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates that would
adversely affect the portfolio position or an anticipated investment position.
Since consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, the Fund will not routinely
enter into foreign currency hedging transactions with respect to security
transactions; however, Bankers Trust believes that it is important to have the
flexibility to enter into foreign currency hedging transactions when it
determines that the transactions would be in the Fund's best interest. Although
these transactions tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain that might be realized should the value of the hedged currency increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such event
the Fund's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts may reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such contracts.
The use of foreign currency forward contracts may not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the prices of or rates of return
on the Fund's foreign currency denominated portfolio securities and the use of
such techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Fund's ability to use
such contracts to hedge its assets.
Investment Restrictions
The following investment restrictions are "fundamental policies" of the
Fund and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Fund. "Majority of the outstanding voting
securities" under the 1940 Act, and as used in this Statement of Additional
Information and the Prospectus, means, with respect to the Fund, the lesser of
(i) 67% or more of the outstanding voting securities of the Fund present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's assets,
it may borrow money as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction (as an operating policy, the Funds may not
engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Trust or the Funds may technically be deemed an underwriter under the 1933 Act
in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value); or (b) through the use of
repurchase agreements or the purchase of short-term obligations;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
in the ordinary course of business (except that the Trust may hold and sell, for
the Fund's portfolio, real estate acquired as a result of the Fund's ownership
of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of
the Fund's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, (except to the extent permitted in
investment restriction No. 1), the provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) purchase the securities of any one issuer if as a result more than
5% of the value of its total assets would be invested in the securities of such
issuer or the Fund would own more than 10% of the outstanding voting securities
of such issuer, except that up to 25% of the value of its total assets may be
invested without regard to these 5% limitation and provided that there is no
limitation with respect to investments in U.S.
Government Securities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Trustees, provide that the Fund may not:
(i) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or management;
(iii) purchase for the Fund securities of any investment company if
such purchase at the time thereof would cause: (a) more than
10% of the Fund's total assets (taken at the greater of cost
or market value) to be invested in the securities of such
issuers; (b) more than 5% of the Fund's total assets (taken at
the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding
voting securities of any such issuer to be held for the Fund
(as an operating policy, the Fund will not invest in another
open-end registered investment company); or
(iv) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board
of Trustees; and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which is not traded flat or in
default as to interest or principal.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
The Fund will comply with the state securities laws and regulations of
all states in which it is registered.
Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on fund transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon the exercise of options. Orders may be directed to
any broker-dealer or futures commission merchant, including to the extent and in
the manner permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain fund securities on behalf of the Fund
are frequently placed by the Manager with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any brokerage
commission being paid by the Fund. Trading does, however, involve transaction
costs. Transactions with dealers serving as market-makers reflect the spread
between the bid and asked prices. Transaction costs may also include fees paid
to third parties for information as to potential purchasers or sellers of
securities. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The Manager seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Fund taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Manager reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Manager is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for the Fund with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Trust may determine, the Manager may consider sales of
shares of a Fund as a factor in the selection of broker-dealers to execute
portfolio transactions. Bankers Trust will make such allocations if commissions
are comparable to those charged by nonaffiliated, qualified broker-dealers for
similar services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research information
in managing the Fund's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Fund and to the Manager, it is the
opinion of the management of the Trust that such information is only
supplementary to the Manager's own research effort, since the information must
still be analyzed, weighed and reviewed by the Manager's staff. Such information
may be useful to the Manager in providing services to clients other than the
Fund, and not all such information is used by the Manager in connection with the
Fund. Conversely, such information provided to the Manager by brokers and
dealers through whom other clients of the Manager effect securities transactions
may be useful to the Manager in providing services to the Fund.
In certain instances there may be securities which are suitable for the
Fund as well as for one or more of the Manager's other clients. Investment
decisions for the Fund and for the Manager's other clients are made with a view
to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. However, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
Total Return: The Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000
(made at the maximum public offering price with all distributions
reinvested) to reach the value of that investment at the end of the
periods. The Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.
Performance Results: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and offering price of
shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund, but also on changes in
the current value of such securities and on changes in the expenses of
the Fund. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total
return of the Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Evaluations of the Fund's performance made by independent sources may
also be used in advertisements concerning the Fund. Sources for the Fund's
performance information could include the following: Asian Wall Street Journal,
Barron's, Business Week, Changing Times, The Kiplinger Magazine, Consumer
Digest, Financial Times, Financial World, Forbes, Fortune, Global Investor,
Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, Money, Morningstar Inc., New York Times, Personal Investing News,
Personal Investor, Success, U.S. News and World Report, Value Line, Wall Street
Journal, Weisenberger Investment Companies Services and Working Women.
VALUATION OF SECURITIES; REDEMPTION IN KIND
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities for
which price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt obligations
and money market securities maturing in 60 days or less are valued at amortized
cost, which approximates market.
Securities for which market quotations are not available are valued by
Bankers Trust pursuant to procedures adopted by the Trust's Board of Trustees.
It is generally agreed that securities for which market quotations are not
readily available should not be valued at the same value as that carried by an
equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the
Manager of the Fund will value such securities based upon all relevant factors
as outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if conditions
exist which make cash payments undesirable, to honor any request for redemption
or repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Trust, and valued as they are for purposes of computing
the Fund's net asset value (a redemption in kind). If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting these securities into cash. The Trust, on behalf of the Fund, and the
Fund have elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares with respect to any one
investor during any 90-day period, solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund at the beginning of the period.
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is composed of persons experienced
in financial matters who meet throughout the year to oversee the activities of
the Fund. In addition, the Trustees review contractual arrangements with
companies that provide services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is One Exchange Place, Boston,
Massachusetts.
Trustees and Officers
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 45 Trustee President of Leadership Capital Inc.
118 North Drive since 1995; Chief Operating Officer of
North Massapequa, NY 11758 CS First Boston Investment Management
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 52 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 65 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 55 Trustee and President Executive Vice President of First Data
Investor Services Group Inc. ("First
Data") since 1994; Senior Vice
President of The Shareholder Services
Group, Inc. (1993-1994); independent
consultant (1990-1993).
Michael Kardok, 37 Vice President and Treasurer Vice President of First Data since May
1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Julie A. Tedesco, 39 Vice President and Secretary Counsel of First Data since May 1994;
Counsel of The Boston Company Advisors
Inc. (1992-1994); Associate at
Hutchins, Wheeler & Dittmar prior to
July 1992.
</TABLE>
Mr. Kardok and Ms. Tedesco also hold similar positions for other investment
companies for which 440 Distributors or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trust. No director, officer or employee of 440 Distributors or
any of its affiliates will receive any compensation from the Trust for serving
as an officer or Trustee of the Trust.
As of September 1, 1996 the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of the Fund or the Trust (all series
taken together).
Investment Manager
Under the terms of the Fund's investment management agreement with
Bankers Trust (the "Management Agreement"), Bankers Trust manages the Fund
subject to the supervision and direction of the Board of Trustees of the Trust.
Bankers Trust will: (i) act in strict conformity with the Trust's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Fund in accordance with the Fund's
investment objectives, restrictions and policies; (iii) make investment
decisions for the Fund; (iv) place purchase and sale orders for securities and
other financial instruments on behalf of the Fund; (v) oversee the
administration of all aspects of the Trust's business and affairs; and (vi)
supervise the performance of professional services provided by others.
Bankers Trust bears all expenses in connection with the performance of
services under the Management Agreement. The Fund bears certain other expenses
incurred in its operation, including: taxes, interest, brokerage fees and
commissions, if any; fees of Trustees of the Trust who are not officers,
directors or employees of Bankers Trust, 440 Distributors or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; cost of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust; and any
extraordinary expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Fund, including outstanding loans to such issuers which could be repaid
in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust, in making its investment decisions, does not obtain or use material
inside information in its possession or in the possession of any of its
affiliates. In making investment recommendations for the Fund, Bankers Trust
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by the Fund is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and in dealing with its customers,
Bankers Trust, its parent, subsidiaries and affiliates will not inquire or take
into consideration whether securities of such customers are held by any fund
managed by Bankers Trust or any such affiliate.
The Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees.
Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of the Fund (including fees pursuant to the Management Agreement, but
excluding interest, taxes, brokerage and, if permitted by the relevant state
securities commissions, extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Fund, Bankers Trust will reimburse the
Fund for the excess expense to the extent required by state law. As of the date
of this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.50% of the Fund's first $30 million of
average annual net assets, 2.00% of the next $70 million of average annual
assets and 1.50% of the remaining average annual net assets.
<PAGE>
Administrator
First Data, One Exchange Place, Boston, Massachusetts 02109, serves as
administrator of the Fund. As administrator, First Data is obligated on a
continuous basis to provide such administrative services as the Board of
Trustees of the Trust reasonably deems necessary for the proper administration
of the Fund. First Data will generally assist in all aspects of the Fund's
operations; supply and maintain office facilities (which may be in First Data's
own offices), statistical and research data, data processing services, clerical,
accounting, bookkeeping and recordkeeping services (including without limitation
the maintenance of such books and records as are required under the 1940 Act and
the rules thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities; supply supporting documentation
for meetings of the Board of Trustees; provide monitoring reports and assistance
regarding compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with Federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net income and
realized capital gains or losses, and negotiate arrangements with, and supervise
and coordinate the activities of, agents and others to supply services.
Custodian and Transfer Agent
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
custodian for the Fund. As custodian, it holds the Fund's assets. Bankers Trust
will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
First Data serves as transfer agent of the Trust. Under its transfer
agency agreement with the Trust, First Data maintains the shareholder account
records for the Fund, handles certain communications between shareholders and
the Fund and causes to be distributed any dividends and distributions payable by
the Fund.
Bankers Trust and First Data may be reimbursed by the Fund for
out-of-pocket expenses.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment manager to
the Fund. The Trust has acknowledged that the term "BT" is used by and is a
property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.
The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the acronym "BT" as part of its name. If this were to
occur, the Trustees would select an appropriate new name for the Trust, but
there would be no other material effect on the Trust, its shareholders or
activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Fund contemplated by the
Management Agreement and other activities for the Fund described in the
Prospectus and this Statement of Additional Information without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. However,
counsel has pointed out that future changes in either Federal or state statutes
and regulations concerning the permissible activities of banks or trust
companies, as well as future judicial or administrative decisions or
interpretations of present and future statutes and regulations, might prevent
Bankers Trust from continuing to perform those services for the Trust and the
Fund. State laws on this issue may differ from the interpretations of relevant
Federal law and banks and financial institutions may be required to register as
dealers pursuant to state securities law. If the circumstances described above
should change, the Boards of Trustees would review the relationships with
Bankers Trust and consider taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as Counsel to the Trust and the Fund.
Ernst & Young L.L.P., 787 Seventh Avenue, New York, New York 10019, acts as
independent accountants of the Trust and the Fund.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
Through its separate accounts the Companies are the Fund's sole
stockholders of record, so under the 1940 Act, the Companies are deemed to be in
control of the Fund. Nevertheless, when a shareholders' meeting occurs, each
Company solicits and accepts voting instructions from its Contractowners who
have allocated or transferred monies for a investment in the Fund as of the
record date of the meeting. Each Company then votes the Fund's shares that are
attributable to its Contractowners' interest in the Fund in proportion to the
voting instructions received. Each Company will vote any share that it is
entitled to vote directly due to amounts it has contributed or accumulated in
its separate accounts in the manner described in the offering memoranda for its
variable annuities and variable life insurance policies.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by a Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
The Trust was organized on January 19, 1996.
TAXATION
Taxation of the Funds
The Trust intends to qualify annually and to elect the Fund to be
treated as a regulated investment company under the Code.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to its shareholders, that is, the
Companies' separate accounts. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains and, therefore, does not anticipate
incurring Federal income tax liability.
The Code and Treasury Department regulations promulgated thereunder
require that mutual funds that are offered through insurance company separate
accounts must meet certain diversification requirements to preserve the
tax-deferred benefits provided by the variable contracts which are offered in
connection with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The offering memoranda
for each Company's variable annuities and variable life insurance policies
describe the federal income tax treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code, the Fund
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h) of
the Code, obligations of the U.S. Treasury and each U.S. Government
instrumentality are treated as securities of separate issuers. The Treasury
Department has indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control of the
investments of a separate account may cause the variable contract owner, rather
than the separate account's sponsoring insurance company, to be treated as the
owner of the assets held by the separate account. If the variable annuity
contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the variable annuity contract owner's gross income. It is not known
what standards will be set forth in such pronouncements or when, if at all,
these pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not have to change
its investment policies or goals.
The foregoing is only a brief summary of important tax law provisions
that affect the Fund. Other Federal, state or local tax law provisions may also
affect the Fund and its operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a variable contract to or from the
Fund should consult a qualified tax adviser.
Distributions
All dividends and capital gains distributions paid by the Fund will be
automatically reinvested, at net asset value, by the Companies' separate
accounts in additional shares of the Fund. There is no fixed dividend rate, and
there can be no assurance that the Fund will pay any dividends to realize any
capital gains. However, the Fund currently intents to pay dividends and capital
gains distributions, if any, on an annual basis. The offering memorandum for a
Company's variable annuity or variable life insurance policies describes the
frequency of distributions to Contractowners and the Federal income tax
treatment of distributions from such contracts to Contractowners.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of the Fund, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of fund
shares held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
Shareholders will be notified annually as to the U.S. Federal tax
status of distributions.
Foreign Withholding Taxes
Income received by the Fund from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. Federal income tax
liability.
Other Taxation
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor the Fund is viable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
Fund shareholders may be subject to state and local taxes on their fund
distributions. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
<PAGE>
Investment Manager of the Fund
BANKERS TRUST GLOBAL INVESTMENT MANAGEMENT
a unit of
BANKERS TRUST COMPANY
Administrator
FIRST DATA INVESTOR SERVICES GROUP, INC.
Distributor
440 FINANCIAL DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
FIRST DATA INVESTOR SERVICES GROUP, INC.
Independent Accountants
ERNST & YOUNG LLP
Counsel
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Fund's Prospectuses, the
Statement of Additional Information or the Trust's official sales literature in
connection with the offering of the Fund's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectus nor this Statement of Additional
Information constitutes an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997 AS SUPPLEMENTED JUNE 16, 1997
BT INSURANCE FUNDS TRUST
Equity 500 Index Fund
BT Insurance Funds Trust (the "Trust") is currently comprised of six
series: the Equity 500 Index Fund (the "Fund") and five other series. The shares
of the Fund are described herein. Capitalized terms not otherwise defined herein
shall have the same meaning as in the Prospectus.
Table of Contents
Risk Factors and Certain Securities and Investment Practices.... 2
Performance Information......................................... 12
Valuation of Securities; Redemption in Kind..................... 13
Management of the Trust......................................... 14
Organization of the Trust....................................... 17
Taxation........................................................ 18
Shares of the Fund are available to the public only through the purchase of
certain variable annuity and variable life insurance contracts ("Contract(s)")
issued by various insurance companies (the "Companies"). The investment adviser
of the Fund is Bankers Trust Global Investment Management, a unit of Bankers
Trust Company (the "Manager" or "Bankers Trust"). The distributor of the Fund
shares is 440 Financial Distributors, Inc. (the "Distributor" or "440
Distributors").
The Prospectus for the Fund is dated February 5, 1997 as supplemented June 16,
1997. The Prospectus provides the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
Customer Service Center at the telephone number shown in the accompanying
prospectus. This Statement of Additional Information, which is not a Prospectus,
is intended to provide additional information regarding the activities and
operations of the Fund and should be read in conjunction with the Fund's
Prospectus. This Statement of Additional Information is not an offer of any Fund
for which an investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have the meanings
accorded to them in the Fund's Prospectus.
BANKERS TRUST GLOBAL INVESTMENT MANAGEMENT, a unit of BANKERS TRUST COMPANY
Investment Manager of the Fund
The Trust's distributor is 440 FINANCIAL DISTRIBUTORS, INC., 4400 Computer
Drive, Westborough, MA 01581.
<PAGE>
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
Investment Objective
The investment objective of the Fund is described in the Fund's
Prospectus. There can, of course, be no assurance that the Fund will achieve its
investment objective.
Investment Practices
The following is a discussion of the various investments of and
techniques employed by the Fund:
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the "1933
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act of resales of certain securities to qualified institutional buyers. The
Manager anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
The Manager will monitor the liquidity of Rule 144A securities in the
Fund's portfolio under the supervision of the Trust's Board of Trustees. In
reaching liquidity decisions, the Manager will consider, among other things, the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers and other potential purchasers wishing to purchase or sell
the security; (iii) dealer undertakings to make a market in the security and
(iv) the nature of the security and of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Lending of Portfolio Securities. The Fund has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. The
Fund will not lend securities to Bankers Trust, the Distributor or their
affiliates. By lending its securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. Government obligations are used
as collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
adhere to the following conditions whenever its securities are loaned: (i) the
Fund must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the level
of the collateral; (iii) the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Trust's Board of Trustees must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When the Fund experiences large cash inflows
through the sale of securities and desirable equity securities, that are
consistent with the Fund's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Fund may hold short-term
investments for a limited time pending availability of such equity securities.
Short-term instruments consist of: (i) short-term obligations issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities or
by any of the states; (ii) other short-term debt securities rated AA or higher
by S&P or Aa or higher by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time the Fund invests in
commercial paper, bank obligations or repurchase agreements, the issuer of the
issuer's parent must have outstanding debt rated AA or higher by S&P or Aa or
higher by Moody's or outstanding commercial paper or bank obligations rated A-1
by S&P or Prime-1 by Moody's; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of Bankers Trust.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Fund until settlement takes place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, the Fund will
maintain with the Fund's custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow. If the Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other Fund obligation,
incur a gain or loss due to market fluctuation. It is the current policy of the
Fund not to enter into when-issued commitments exceeding in the aggregate 15% of
the market value of the Fund's total assets, less liabilities other than the
obligations created by when-issued commitments.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Fund must look principally to
the federal agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which the Fund may invest that are not backed by the full faith
and credit of the United States include, but are not limited to, obligations of
the Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation and
the U.S. Postal Service, each of which has the right to borrow from the U.S.
Treasury to meet its obligations, and obligations of the Federal Farm Credit
System and the Federal Home Loan Banks, both of whose obligations may be
satisfied only by the individual credits of each issuing agency. Securities
which are backed by the full faith and credit of the United States include
obligations of the Government National Mortgage Association, the Farmers Home
Administration, and the export-import Bank.
Equity Investments. The Fund may invest in equity securities listed on
any domestic securities exchange or traded in the over-the-counter market as
well as certain restricted or unlisted securities. They may or may not pay
dividends or carry voting rights. Common stock occupies the most junior position
in a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
or emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage, by among other things, agreeing to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). At the time the Fund enters into a reverse repurchase
agreement it will place in a segregated custodial cash account, U.S. Government
Obligations or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by the Fund.
Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of time. The
strike price of warrants sometimes is much lower than the current market price
of the underlying securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a debt security
or preferred stock which may be converted into common stock or carries the right
to purchase common stock. Convertible securities entitle the holder to exchange
the securities for a specified number of shares of common stock, usually of the
same company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Manager's skill and experience with respect to such instruments. When futures
are purchased to hedge against a possible increase in the price of securities
before the Fund is able to invest its cash (or cash equivalents) in an orderly
fashion, it is possible that the market may decline instead; if the Fund then
concludes not to invest its cash at that time because of concern as to possible
further market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of the
instruments that were to be purchased. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in the price of the securities hedged or used for cover will not be
perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject
to special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities in the Fund. Successful use of futures or options
contracts is further dependent on Bankers Trust's ability to correctly predict
movements in the securities markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices are subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying securities above the
options exercise price.
Futures Contracts. The Fund may enter into securities index futures
contracts. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
These investments will be made by the Fund solely for cash management purposes.
Such investments will be made only if they are economically appropriate to the
reduction of risks involved in the management of the Fund. In this regard, the
Fund may enter into futures contracts or options on futures related to the
Standard & Poor's 500 Composite Stock Price Index.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Manager may still not
result in a successful transaction.
In addition, futures contracts entail risks. The Manager believes that
use of such contracts will benefit the Fund. The successful use of futures
contracts, however, depends on the degree of correlation between the futures and
securities markets.
Options on Futures Contracts. The Fund may use stock index futures on a
continual basis to equitize cash so that the Fund may maintain 100% equity
exposure. The Board of Trustees has adopted a restriction that the Fund will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Fund and premiums paid on outstanding options on futures contracts owned by the
Fund (other than those entered into for bona fide hedging purposes) would exceed
5% of the market value of the total assets of the Fund.
A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. The Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received will
be included as initial margin deposits. In anticipation of a decline in interest
rates, the Fund may purchase call options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund intends to purchase. Similarly, if the
value of the securities held by the Fund is expected to decline as a result of
an increase in interest rates, the Fund might purchase put options or sell call
options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contact involves risks similar to those risks relating to
the sale of futures contracts.
Options on Securities Indices. The Fund may purchase and write (sell)
call and put options on securities indices. Such options give the holder the
right to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index.
Options on securities indices entail certain risks. The absence of a
liquid secondary market to close out options positions on securities indices may
occur, although the Fund generally will only purchase or write such an option if
the Manager believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase such options unless the
Manager believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Manager may be forced to liquidate portfolio
securities to meet settlement obligations.
Investment Restrictions
The following investment restrictions are "fundamental policies" of the
Fund and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Fund. "Majority of the outstanding voting
securities" under the 1940 Act, and as used in this Statement of Additional
Information and the Prospectus, means, with respect to the Fund, the lesser of
(i) 67% or more of the outstanding voting securities of the Fund present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's assets,
it may borrow money as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction (as an operating policy, the Funds may not
engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Trust or the Funds may technically be deemed an underwriter under the 1933 Act
in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value); or (b) through the use of
repurchase agreements or the purchase of short-term obligations;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
in the ordinary course of business (except that the Trust may hold and sell, for
the Fund's portfolio, real estate acquired as a result of the Fund's ownership
of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of
the Fund's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder (except to the extent permitted in investment
restriction No. 1), provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction; and
(7) purchase the securities of any one issuer if as a result more than
5% of the value of its total assets would be invested in the securities of such
issuer or the Fund would own more than 10% of the outstanding voting securities
of such issuer, except that up to 25% of the value of its total assets may be
invested without regard to these 5% limitation and provided that there is no
limitation with respect to investments in U.S.
Government Securities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Trustees, provide that the Fund may not:
(i) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or management;
(iii) purchase for the Fund securities of any investment company if
such purchase at the time thereof would cause: (a) more than
10% of the Fund's total assets (taken at the greater of cost
or market value) to be invested in the securities of such
issuers; (b) more than 5% of the Fund's total assets (taken at
the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding
voting securities of any such issuer to be held for the Fund
(as an operating policy, the Fund will not invest in another
open-end registered investment company); or
(iv) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board
of Trustees; and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which is not traded flat or in
default as to interest or principal.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
The Fund will comply with the state securities laws and regulations of
all states in which it is registered.
Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on fund transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon the exercise of options. Orders may be directed to
any broker-dealer or futures commission merchant, including to the extent and in
the manner permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain fund securities on behalf of the Fund
are frequently placed by the Manager with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any brokerage
commission being paid by the Fund. Trading does, however, involve transaction
costs. Transactions with dealers serving as market-makers reflect the spread
between the bid and asked prices. Transaction costs may also include fees paid
to third parties for information as to potential purchasers or sellers of
securities. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The Manager seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Fund taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Manager reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Manager is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for the Fund with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Trust may determine, the Manager may consider sales of
shares of a Fund as a factor in the selection of broker-dealers to execute
portfolio transactions. Bankers Trust will make such allocations if commissions
are comparable to those charged by nonaffiliated, qualified broker-dealers for
similar services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research information
in managing the Fund's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Fund and to the Manager, it is the
opinion of the management of the Trust that such information is only
supplementary to the Manager's own research effort, since the information must
still be analyzed, weighed and reviewed by the Manager's staff. Such information
may be useful to the Manager in providing services to clients other than the
Fund, and not all such information is used by the Manager in connection with the
Fund. Conversely, such information provided to the Manager by brokers and
dealers through whom other clients of the Manager effect securities transactions
may be useful to the Manager in providing services to the Fund.
In certain instances there may be securities which are suitable for the
Fund as well as for one or more of the Manager's other clients. Investment
decisions for the Fund and for the Manager's other clients are made with a view
to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. However, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
Total return: The Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000
(made at the maximum public offering price with all distributions
reinvested) to reach the value of that investment at the end of the
periods. The Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.
Performance Results: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and offering price of
shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund, but also on changes in
the current value of such securities and on changes in the expenses of
the Fund. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total
return of the Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Evaluations of the Fund's performance made by independent sources may also be
used in advertisements concerning the Fund. Sources for the Fund's performance
information could include the following: Barron's, Business Week, Changing
Times, The Kiplinger's Magazine, Consumer Digest, Financial Times, Financial
World, Forbes, Fortune, Investor's Daily, Lipper Analytical Services, Inc.'s
Mutual Fund Performance Analysis, Money, Morningstar Inc., New York Times,
Personal Investing News, Personal Investor, Success, U.S. News and World Report,
Value Line, Wall Street Journal, Weisenberger Investment Companies Services and
Working Women.
<PAGE>
VALUATION OF SECURITIES; REDEMPTION IN KIND
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities for
which price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt obligations
and money market securities maturing in 60 days or less are valued at amortized
cost, which approximates market.
Securities for which market quotations are not available are valued by
Bankers Trust pursuant to procedures adopted by the Trust's Board of Trustees.
It is generally agreed that securities for which market quotations are not
readily available should not be valued at the same value as that carried by an
equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the
Manager of the Fund will value such securities based upon all relevant factors
as outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if conditions
exist which make cash payments undesirable, to honor any request for redemption
or repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Trust, and valued as they are for purposes of computing
the Fund's net asset value (a redemption in kind). If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting these securities into cash. The Trust, on behalf of the Fund, and the
Fund have elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares with respect to any one
investor during any 90-day period, solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund at the beginning of the period.
<PAGE>
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is composed of persons experienced
in financial matters who meet throughout the year to oversee the activities of
the Fund. In addition, the Trustees review contractual arrangements with
companies that provide services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is One Exchange Place, Boston,
Massachusetts.
Trustees and Officers
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 45 Trustee President of Leadership Capital Inc.
118 North Drive since 1995; Chief Operating Officer of
North Massapequa, NY 11758 CS First Boston Investment Management
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 52 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 65 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 55 Trustee and President Executive Vice President of First Data
Investor Services Group Inc. ("First
Data") since 1994; Senior Vice
President of The Shareholder Services
Group, Inc. (1993-1994); independent
consultant (1990-1993).
Michael Kardok, 37 Vice President and Treasurer Vice President of First Data since May
1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Julie A. Tedesco, 39 Vice President and Secretary Counsel of First Data since May 1994;
Counsel of The Boston Company Advisors
Inc. (1992-1994); Associate at
Hutchins, Wheeler & Dittmar prior to
July 1992.
</TABLE>
Mr. Kardok and Ms. Tedesco also hold similar positions for other investment
companies for which 440 Distributors or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trust. No director, officer or employee of 440 Distributors or
any of its affiliates will receive any compensation from the Trust for serving
as an officer or Trustee of the Trust.
As of September 1, 1996 the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of the Fund or the Trust (all series
taken together).
Investment Manager
Under the terms of the Fund's investment management agreement with
Bankers Trust (the "Management Agreement"), Bankers Trust manages the Fund
subject to the supervision and direction of the Board of Trustees of the Trust.
Bankers Trust will: (i) act in strict conformity with the Trust's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Fund in accordance with the Fund's
investment objectives, restrictions and policies; (iii) make investment
decisions for the Fund; (iv) place purchase and sale orders for securities and
other financial instruments on behalf of the Fund; (v) oversee the
administration of all aspects of the Trust's business and affairs; and (vi)
supervise the performance of professional services provided by others.
Bankers Trust bears all expenses in connection with the performance of
services under the Management Agreement. The Fund bears certain other expenses
incurred in its operation, including: taxes, interest, brokerage fees and
commissions, if any; fees of Trustees of the Trust who are not officers,
directors or employees of Bankers Trust, 440 Distributors or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; cost of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust; and any
extraordinary expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Fund, including outstanding loans to such issuers which could be repaid
in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust, in making its investment decisions, does not obtain or use material
inside information in its possession or in the possession of any of its
affiliates. In making investment recommendations for the Fund, Bankers Trust
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by the Fund is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and in dealing with its customers,
Bankers Trust, its parent, subsidiaries and affiliates will not inquire or take
into consideration whether securities of such customers are held by any fund
managed by Bankers Trust or any such affiliate.
The Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees.
Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of the Fund (including fees pursuant to the Management Agreement, but
excluding interest, taxes, brokerage and, if permitted by the relevant state
securities commissions, extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Fund, Bankers Trust will reimburse the
Fund for the excess expense to the extent required by state law. As of the date
of this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.50% of the Fund's first $30 million of
average annual net assets, 2.00% of the next $70 million of average annual
assets and 1.50% of the remaining average annual net assets.
Administrator
First Data, One Exchange Place, Boston, Massachusetts 02109, serves as
administrator of the Fund. As administrator, First Data is obligated on a
continuous basis to provide such administrative services as the Board of
Trustees of the Trust reasonably deems necessary for the proper administration
of the Fund. First Data will generally assist in all aspects of the Fund's
operations; supply and maintain office facilities (which may be in First Data's
own offices), statistical and research data, data processing services, clerical,
accounting, bookkeeping and recordkeeping services (including without limitation
the maintenance of such books and records as are required under the 1940 Act and
the rules thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities; supply supporting documentation
for meetings of the Board of Trustees; provide monitoring reports and assistance
regarding compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with Federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net income and
realized capital gains or losses, and negotiate arrangements with, and supervise
and coordinate the activities of, agents and others to supply services.
Custodian and Transfer Agent
Bankers Trust, 280 Park Avunue, New York, New York 10006, serves as
custodian for the Fund. As custodian, it holds the Fund's assets. Bankers Trust
will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
First Data serves as transfer agent of the Trust. Under its transfer
agency agreement with the Trust, First Data maintains the shareholder account
records for the Fund, handles certain communications between shareholders and
the Fund and causes to be distributed any dividends and distributions payable by
the Fund.
Bankers Trust and First Data may be reimbursed by the Fund for
out-of-pocket expenses.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment manager to
the Fund. The Trust has acknowledged that the term "BT" is used by and is a
property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.
The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the acronym "BT" as part of its name. If this were to
occur, the Trustees would select an appropriate new name for the Trust, but
there would be no other material effect on the Trust, its shareholders or
activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Fund contemplated by the
Management Agreement and other activities for the Fund described in the
Prospectus and this Statement of Additional Information without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. However,
counsel has pointed out that future changes in either Federal or state statutes
and regulations concerning the permissible activities of banks or trust
companies, as well as future judicial or administrative decisions or
interpretations of present and future statutes and regulations, might prevent
Bankers Trust from continuing to perform those services for the Trust and the
Fund. State laws on this issue may differ from the interpretations of relevant
Federal law and banks and financial institutions may be required to register as
dealers pursuant to state securities law. If the circumstances described above
should change, the Boards of Trustees would review the relationships with
Bankers Trust and consider taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as Counsel to the Trust and the Fund.
Ernst & Young L.L.P., 787 Seventh Avenue, New York, New York 10019, acts as
independent accountants of the Trust and the Fund.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
Through its separate accounts the Companies are the Fund's sole
stockholders of record, so under the 1940 Act, the Companies are deemed to be in
control of the Fund. Nevertheless, when a shareholders' meeting occurs, each
Company solicits and accepts voting instructions from its Contractowners who
have allocated or transferred monies for a investment in the Fund as of the
record date of the meeting. Each Company then votes the Fund's shares that are
attributable to its Contractowners' interest in the Fund in proportion to the
voting instructions received. Each Company will vote any share that it is
entitled to vote directly due to amounts it has contributed or accumulated in
its separate accounts in the manner described in the offering memoranda for its
variable annuities and variable life insurance policies.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by a Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
The Trust was organized on January 19, 1996.
TAXATION
Taxation of the Funds
The Trust intends to qualify annually and to elect the Fund to be
treated as a regulated investment company under the Internal Revenue Code of
1986, as amended.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to its shareholders, that is, the
Companies' separate accounts. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains and, therefore, does not anticipate
incurring Federal income tax liability.
The Code and Treasury Department regulations promulgated thereunder
require that mutual funds that are offered through insurance company separate
accounts must meet certain diversification requirements to preserve the
tax-deferred benefits provided by the variable contracts which are offered in
connection with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The offering memoranda
for each Company's variable annuities and variable life insurance policies
describe the federal income tax treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code, the Fund
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h) of
the Code, obligations of the U.S. Treasury and each U.S. Government
instrumentality are treated as securities of separate issuers. The Treasury
Department has indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control of the
investments of a separate account may cause the variable contract owner, rather
than the separate account's sponsoring insurance company, to be treated as the
owner of the assets held by the separate account. If the variable annuity
contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the variable annuity contract owner's gross income. It is not known
what standards will be set forth in such pronouncements or when, if at all,
these pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not have to change
its investment policies or goals.
The foregoing is only a brief summary of important tax law provisions
that affect the Fund. Other Federal, state or local tax law provisions may also
affect the Fund and its operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a variable contract to or from the
Fund should consult a qualified tax adviser.
Distributions
All dividends and capital distributions paid by the Fund will be
automatically reinvested, at net asset value, by the Companies' separate
accounts in additional shares of the Fund. There is no fixed dividend rate, and
there can be no assurance that the Fund will pay any dividends or realize any
capital gains. However, the Fund currently intends to pay dividends and capital
gains distributions, if any, on an annual basis. The offering memorandum for a
Company's variable annuity or variable life insurance policies describes the
frequency of distributions to Contractowners and the Federal income tax
treatment of distributions from such contracts to Contractowners.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of the Fund, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of fund
shares held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
Shareholders will be notified annually as to the U.S. Federal tax
status of distributions.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. Federal income tax
liability.
Other Taxation
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor the Fund is viable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
Fund shareholders may be subject to state and local taxes on their fund
distributions. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
<PAGE>
g:\shared\bankers\sai\eq500-5.doc
Investment Manager of the Fund
BANKERS TRUST GLOBAL INVESTMENT MANAGEMENT
a unit of
BANKERS TRUST COMPANY
Administrator
FIRST DATA INVESTOR SERVICES GROUP, INC.
Distributor
440 FINANCIAL DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
FIRST DATA INVESTOR SERVICES GROUP, INC.
Independent Accountants
ERNST & YOUNG LLP
Counsel
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Fund's Prospectuses, the
Statement of Additional Information or the Trust's official sales literature in
connection with the offering of the Fund's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectus nor this Statement of Additional
Information constitutes an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.
